P2.T7.812. Risks related to money laundering and financing of terrorism

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Explain best practices recommended by the Basel Committee for the assessment, management, mitigation and monitoring of money laundering and financial terrorism (ML/FT) risks. Describe recommended practices for the acceptance, verification and identification of customers at a bank.


812.1. In service of a bank's management of its money laundering (ML) and financing of terrorism (FT) risks, according to the Basel Committee, which of the following statements is TRUE or ACCURATE about the role of the three lines of defense?

a. The three lines of defense serve an important function, but they do not directly interface or support the bank's separate anti-money laundering (AML) and countering financing of terrorism (CFT) policies and procedures
b. As part of the first line of defense, external auditors may train internal auditors and assist in the (temporary) transition of responsibilities to internal audit, but external auditors should not attempt to confirm compliance with AML/CFT regulations as this is an internal responsibility
c. As part of the second line of defense, the chief AML/CFT officer should be responsible for ongoing monitoring of the fulfillment of all AML/CFT duties by the bank, and this chief AMT/CFT officer should be the contact point regarding all AML/CFT issues for internal and external authorities, including supervisory authorities or financial intelligence units (FIUs)
d. As part of the third line of defense, information technology (IT) should guarantee an adequate transaction monitoring system, an ongoing monitoring system, and the management of information (e.g., record-keeping)

812.2. Among the Best Practices recommended by the Basel Committee for the assessment, management, mitigation and monitoring of money laundering and financial terrorism (ML/FT) risks, each of the following is true EXCEPT which is inaccurate and/or false?

a. Confidential numbered accounts are exempt from the bank's customer due diligence (CDD) procedures
b. Banks should identify categories of higher-risk customers, and for these higher-risk customers should have established enhanced due diligence policies and enhanced transaction monitoring
c. The Basel Committee's Guidelines support implementation of the Financial Action Task Force's (FATF) standards on Combating Money Laundering and the Financing of Terrorism and Proliferation
d. Recent developments (including enforcement actions) prove that inadequate ML/FT risk management exposes banks especially to the following risks: reputational, operational, compliance and concentration risks

812.3. Acme Bank of Canada recently received an application by Zathstreet LLC to open a new business (customer) account and immediately transfer funds to a recipient in a country that was recently removed from the list of state sponsors of terrorism. The bank initiated its customer due diligence (CDD) procedures and most of those CDD steps have been successfully conducted except verification has not been completed. Which of the following procedures is probably the most appropriate next step?

a. In order to protect privacy rights, Acme may collect only essential customer demographic information but should neither develop nor store a profile of the customer
b. Acme should file a suspicious transaction report (STR) but must inform the principals at Zathstreet (including in writing) as soon as possible that an STR has been filed
c. Acme should not open the account except in some circumstances where it would be possible for verification to be completed after the establishment of the business relationship
d. Acme can open the account and perform the transaction without limitations (a necessary feature of functioning markets) if Zathstreet switches to either an anonymous account or an account under a fictitious name

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